What is a 'Non-Compete Agreement'

A non-compete agreement is an agreement between an employer and an employee in which the employee agrees not to use information learned during employment to enter into competition in subsequent business efforts. 

BREAKING DOWN 'Non-Compete Agreement'

Non-compete agreements usually state that the employee cannot enter into certain professions which would be considered to be in competition with their current employer for a specified period of time and/or within a specified geographic area. This sort of agreement can also be called a "covenant not to compete" or a "restrictive covenant."

Employers usually insist on non-compete agreements because of the possibility that an employee, upon termination or resignation, will work for a competitor or start a business. The employee might then gain a competitive advantage over their former employer by abusing confidential information about their former employer's trade secrets or sensitive information such as business practices, upcoming products, marketing plans and customer or client lists. These agreements can also be enforced to prevent former employees from entering into work in a similar industry, even if that work would not involve the disclosure of trade secrets. 

Non-compete agreements are distinct from non-disclosure agreements, which would not necessarily prevent an employee from working for a competitor but would prevent the employee from revealing information the employer considers to be proprietary or confidential, such as client lists, underlying technology, or information about products in development. 

Non-Compete Agreements in Context

A common example of non-compete agreements is with media personalities: a television station could be legitimately worried that a popular meteorologist could siphon viewers away if the meteorologist began working for a rival station in the same state. In most jurisdictions this would be considered reasonable cause to sign a non-compete agreement. 

In the U.S., the legal status of non-compete agreements is a matter of state jurisdiction. States vary widely in their enforcement and recognition of non-compete agreements, and many state legislatures have undertaken recent debates and updated legislation related to non-compete agreements. With a few specific exceptions, California does not recognize non-compete agreements at all. Hawaii passed a law in 2015 barring high-tech companies from asking their employees to sign non-compete agreements; the following year Utah passed a resolution stating that new non-compete agreements may not last for more than a year.

Most states adopt some sort of standard holding that a non-compete agreement must not be egregious in length of time or geographic scope, and shouldn't meaningfully restrict a worker's ability to find employment; however, jurisdictions differ widely in interpreting what terms of a non-compete agreement would be overly onerous.

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